Solid as a rock

For decades, that described Bank of Granite. Here’s what caused it to crumble.

By Edward Martin

All is quiet in the modest white house under the oaks he planted as saplings when he and Kathleen moved here in 1954. Floyd Council Wilson shivers under two flannel shirts, and the dark sky of a rising spring storm makes the red-bloomed shrubbery outside seem brighter. “Azaleas are the fullest this year I’ve ever seen them,” he says softly. He tugs a wingback chair under a lamp by the mantle, opens a green spiral-bound notebook, squints and moistens his thumb.

“The old bank sold out in ’54, and we were part of the new ones who bought in,” he says. “Bought five shares, $211.55 a share.” He would serve on its board of directors. “Now, I want to get this right. Yes, right here, paid $1,057.75.” He leafs through page after page of dates and figures in small, neat handwriting. “Here’s where we got $358.34 in dividends for these three months, and here’s where we got … ” As he flips the pages, the years pass faster.

The oaks grew tall. He and his wife raised two sons, who moved away and became successful. He buried her in 1988 and retired from the other love of his life, Wilson-Abernathy Hardware Co., up the hill on Main Street. At 92, he still misses it. A few doors down from what’s now Granite Hardware are some small shops. At Fairway Cleaners & Laundry, just up the street, Fran and Doris still keep track of who’s laid up, who’s having a baby.

Wilson thought Bank of Granite would always be like this, solid as Granite Falls, the little town that gave it its name. By the middle ’90s, with growth and splits, a share like his bought in 1954 had blossomed into about 2,300 shares, worth more than $67,000. The little bank from the little town won big fame. By then, it had recorded more than 160 straight quarters of increasing dividends — it would go on to exceed 200 — a feat no U.S. bank, big or small, is likely to match.

He turns to another page and stops. There’s a blank where the dividend should be. “That’s what I had been living on. This is when it quit coming.” Now there’s a notation: “Social Security, $1,200.” A labored breath turns into a sigh. “I tried to warn them.” He lowers his voice. “Don’t know if I should say this, but I think maybe they got greedy.”

In September 2008, 102 years after it was founded, Bank of Granite was so close to collapse the Federal Deposit Insurance Corp. warned that it would have to, as regulators say, “cease and desist” operations unless things got better in a hurry. Staggering under bad loans, its death march stumbled through three years of recovery attempts. “Bless our investors,” a board member prayed at a 2010 shareholder meeting, as the stock price plunged to less than a dollar a share.

The prayer went unanswered. In April 2011, Bank of Granite announced it would be acquired in an all-stock deal, with its shares valued at 84 cents each, by Asheboro-based FNB United Corp. Its signs in eight counties, including the one now rusting in Granite Falls, will come down by the end of this year, says FNB CEO Brian Simpson, who helped raise $310 million in private-equity capital to seal the deal. The combined banks have about 500 employees, 63 branches — including Bank of Granite’s 18 — and about $2.5 billion of assets. “We’ll consolidate operations in Asheboro and operate as CommunityOne Bank,” Simpson says, adding that he expects “some branch consolidation.” But he won’t say how many closings and layoffs are coming.

The deal was Bank of Granite’s salvation but an ignominious ending. FNB started as First National Bank of Asheboro in 1907, scarcely a year after Bank of Granite opened. It too had recently been warned that it was on the brink of failure and barely avoided prosecution in connection with a customer’s $40 million Ponzi scheme, paying $400,000 in restitution and promising the U.S. Department of Justice it wouldn’t happen again.

The implications of Bank of Granite’s downfall go far beyond the town of Granite Falls, population about 4,600. Many of North Carolina’s 60-odd other community banks, generally defined as those with less than $1 billion of assets, are struggling, says Ray Grace, acting state banking commissioner. Barely a decade after bullish investors were creating new ones at a clip of a dozen or more a year, no community bank has been chartered in North Carolina since 2009. Only five were created nationwide in 2010. And none since. “Scary,” says Tony Plath, a UNC Charlotte associate professor of finance. “Community banks are the best example of grassroots capitalism in our economy.” Grace agrees. “Community banks control 11% of all banking assets in the nation but make about 40% of the small-business loans. That’s a huge piece of the economy.”

Granite Falls Mayor Barry Hayes sits behind a desk in the small municipal complex that includes Bank of Granite’s original headquarters, a gray-stone building heightened to two stories in 1938. Hayes, whose company sells water chemicals to textile and furniture makers, recounts the routes he bicycled to the house of his buddy, Mike Mackie, now president of his family’s Mackie Furniture Co., established 1925. They’re 64 now. “We didn’t take the bank for granted, but we weren’t awestruck by it either,” the mayor says with a shrug. “It was always like a big brother you could depend on.” Losing it, they say here, is like a death in the family.

The Buffett Curse, Plath and others call it, tracing it to a precise time and place: May 7, 1996, at the annual meeting of Berkshire Hathaway Inc. in Omaha, Neb. John A. Forlines Jr., 78, listened as legendary investor Warren Buffett praised Bank of Granite, noting that a financial institution doesn’t have to be big to be successful, a sobriquet quickly condensed to “the best little bank in America.” Though Buffett’s conglomerate was worth $40 billion and Forline’s bank less than $500 million, the CEOs shared many traits.

In Omaha, one of the world’s richest men drove a worn Lincoln to work and lunched at a blue-collar steakhouse. Describing Forlines, Mackie sinks into a plush, brown recliner in his furniture showroom. “He’d come walking down the street every day when he was in town, down to City Cafe for lunch. He wasn’t afraid to speak. Matter of fact, he’d go out of his way to.” Buffet has donated billions to charities. Forlines gave millions to his causes, his name prominent on buildings at Caldwell County Community College and Technical Institute, just up U.S. 321 from Granite Falls. “

John Forlines was the epitome of the Southern community banker,” Plath says. “He was polite, quiet, plainspoken and down-to-earth.” Son of a grocery clerk, he was born in Graham and grew up in Durham. He worked his way through Duke University, where he earned a bachelor’s in business in 1939, running a one-man campus bank branch. He entered the Army as a private in 1940, rising to major in the Finance Corps in World War II. He returned to Durham, where he operated a hardware store with his brother-in-law.

In Granite Falls, the little bank drifted along, much as it had for nearly 50 years. In 1954, still heated by a pot-bellied stove in the lobby, it had five employees and $1.2 million of assets. Only two banks in the state were smaller, and its owners wanted out. Forlines, who wanted to get back into banking, met with the new investors, who asked him to become president and chairman. In a show of confidence, he invested $25,000 of his own money, then began enlisting other investors such as Floyd Wilson. Though Forlines would come to epitomize them, Bank of Granite’s traits were the hallmark of hometown banking. The town had a savings and loan, but the bank, its only bank, was its financial heart.

“Any time I’d accomplish something, in sports or business or whatever, I’d get a note from Mr. Forlines congratulating me,” Mackie says. He remembers the Christmas Club. “You put in 50 cents or a dollar a week, and come Christmas, you’d have a lot, at least a lot for that time.” Furniture makers and owners of the hardwood lumberyards, whose scent still wafts across Granite Falls and the adjacent town of Sawmills, could structure loan payments to their business cycles. “Community banks,” Grace says, “do business differently than big banks in terms of tailoring products and services to the specific needs of the community.” Bankers like Forlines knew their customers, and their character, as well as they knew their balance sheets. “When his wife died,” Wilson recalls, “somebody asked me if I thought he’d get married again. I said, ‘No sir. He’s married to the Bank of Granite.’”

In 1959, the bank opened its first branch office, in Lenoir. It spread to surrounding towns in the four-county foothills region known as Unifour, domain of major manufacturers such as Broyhill Furniture Industries Inc. but also mom-and-pop sock makers and woodworkers. In 1984, Bank of Granite Corp., a holding company, went public. Though growing, it stuck close to home. But its home turf was shifting beneath its feet. Not only Unifour but all of North Carolina was losing traditional industries to foreign competition and automation. In the pivotal period from 1990 to 2004, some sectors were hit harder than others. Textiles and furniture lost more than 200,000 jobs statewide, while other manufacturing lost just 27,000.

The bank was adapting in some ways but clinging to old ways in others. In 1996, it acquired a mortgage company, and its loan portfolio began shifting as the region’s foothill lakes attracted retirees, second-home buyers and developers. “It wasn’t as isolated, it wasn’t as riskless, it wasn’t based on the same set of a thousand families who lived in the community,” Plath says. “You needed to make loans based on technical finance. You couldn’t make them based on character anymore.”

It’s a problem community banks still face, Grace says. “You get to a comfort zone with customers, and when you’ve successfully banked those customers for many years, you get lulled into a false sense of security. You don’t pay attention to what’s going on in those businesses and the larger economy. You take your eye off the ball. In the Unifour region, the furniture industry in particular saw boom times and then fairly suddenly collapsed. That had a collateral effect, and suddenly you had a broad-based decline.”

Doing it the old way was not the only thing old about the bank. Back in 1982, Forlines had recruited Charles Snipes, who ran a community bank in nearby Lincolnton, as executive vice president. Though 16 years younger, Snipes was not seen — either by Forlines or the board, insiders say — as heir apparent. He and Forlines were too alike for Snipes to be the fresh blood to lead the bank into a new era. Several times they tried to groom a successor, but it never seemed to work out. One left in 1996 to run a chain of steakhouses. In 2003, when Bank of Granite made its first acquisition — First Commerce Corp. in Charlotte — CEO Wes Sturges was expected to become president of the combined company, but he departed the following year.

Some blame the Buffett Curse: The bank and its leader had become legends in the industry. “It was no longer, ‘We are the Bank of Granite,’” a former executive says. “It was, ‘We are the Bank of Granite.’” He and others describe a tug of war over expansion, sometimes disagreeing on who was pulling which end of the rope, management or the directors. “You had a bank beginning to grow with uncharacteristic speed,” Grace says. “They still hold the record for the most quarters of increasing dividends of any bank in the nation, but they became victims to some extent of their own success. It was like the athlete that reads his own press and starts to believe it.”

With the $21 million acquisition of First Commerce and its three Mecklenburg County branches, Bank of Granite entered the competitive Charlotte market. Soon, it had 21 branches in all. But on the books festered millions in character loans and, increasingly, loans to developers and speculators as the real-estate market hurtled toward collapse.

When he owned Wilson-Abernathy Hardware, Floyd Wilson had borrowed money from the bank from time to time. He thumbs through his green notebook, through the ’50s, ’60s and ’70s, tracing figures with a wizened finger. “Well, they treated me just like anybody else,” he says. “I had to pay it back.”

The size of the crowd on a festive October day in 2006 surprised Mayor Barry Hayes. One hundred years earlier, a Sunday school teacher had made the first deposit, and now the town square is packed with residents, bank employees and dignitaries to dedicate a Bank of Granite centennial time capsule being buried at the foot of the town icon, a refrigerator-size hunk of rough granite. “I introduced Mr. Forlines and presented him an award,” Hayes recalls. “I guess I could have called him John — he would have been fine with that — but I never did. He just smiled graciously. You couldn’t talk about the bank without talking about him. He was here for more than half of the life of the bank.” If anybody sensed uneasiness behind his smile, they didn’t let on.

Forlines finally had relinquished the reins to Snipes in January. He was 88, and his successor was 72. As chairman emeritus, Forlines took pride in coming to work each day. But Hayes, a member of the bank’s local advisory board, noticed a change. “Mr. Forlines wasn’t the kind of guy who’d sit there and be morbid about it, but I’d never seen him this way. I’d go in his office, and he would just shake his head.”

Snipes, now 78 and living in nearby Lincolnton, declined to talk about the bank’s collapse. Not even a sentimental look back? “Especially that,” he replies, a quiver in his voice. Says Plath: “Until Bank of Granite, I always viewed bank failures as a financial event, rather than a human event. These guys viewed it as a personal failure, a failure to their community.”

When the time capsule was buried, Bank of Granite’s troubled assets — loans more than 90 days overdue, foreclosed property and other problem holdings — equaled 34% of its capital and reserves. The national median was 5%, even that worrisome to analysts. A $1 billion bank with $100 million in rickety loans would have a troubled-asset ratio of 10%. Many in Granite Falls were in denial. “A lot of folks here rode it to the bitter end,” Mackie says. “Me, for one. I’d reinvested my children’s dividends their entire life, and I rode that wagon too long.” Collapse? Not here, they said, even in 2008 after giant Charlotte-based Wachovia Corp. came within a frantic September weekend of failing. “I didn’t worry,” Hayes says. “As soon as the economy turned, Bank of Granite would come back.”

In 2008, Snipes retired, succeeded by President Scott Anderson, then 52, its chief operating officer since coming from RBC Centura four years earlier. In the late ’90s, he had been president of The Bank of Mecklenburg, a community bank in Charlotte. But hard times were settling in, especially in Unifour, where unemployment rose above 15%. Nationally, the median troubled-asset ratio for banks had climbed to nearly 10%. Bank of Granite’s was 55%. “The loans are made,” Hayes says. “The money’s gone, and you know you are not getting it back.”

That September, the bank didn’t pay a dividend for the first time in more than 200 quarters. Suspending it saved about $2 million a quarter. Laying off scores of its 390 employees would save $1.5 million in the coming year. By then, nearly three-quarters of its bad loans were tied to real estate. The death march was turning into a sprint. Under Anderson, the bank cut its losses from $25 million in 2009 to $23.7 million in 2010, but the bomb kept ticking. By June 2010, its troubled-asset ratio had climbed to a devastating 159%, compared with the national median of 15%, overwhelming its reserves.

The following month, John Arthur Forlines Jr. died at the age 92 — peacefully, his family says — asking that memorial donations go to hospice, one of his favorite charities since his wife’s death from cancer in 1982. His bank would outlive him by only nine months, until April 2011, when it was taken over by FNB.

Here the world comes to rest in the softly lit showroom of Mike Mackie’s nearly 90-year-old furniture store and with it, some believe, the future of community banking. When he, his father and grandfather had a choice, what they sold was made just up the road, somewhere in North Carolina. Upholstered furniture still might be, but casegoods, wood pieces such as dressers and chests, come from Vietnam, China and who knows where. Decline of local industries contributed to the bank’s fall, and its losses as a local employer are contributing to Mackie’s decline in sales, down some 30% since the recession began. Similar scenarios are being rerun in dozens of small towns throughout the state.

Across the street from Mayor Hayes’ office, the massive, low-slung Shuford Mills cotton-cordage plant, once Granite Falls’ largest employer with 600 workers, is empty. At Fairview Cleaners, Fran Starnes sits at her desk next to an open door on a warm afternoon. Flowers bloom outside. “One of the girls I go to church with is losing her job.” She motions across Main at the bank’s operations center. “They’ve told her the last of the month will be her last day.” FNB CEO Simpson confirms the center will move to Asheboro but won’t say when.

At least Bank of Granite’s genes have a good chance of surviving as CommunityOne. Simpson has slashed nonperforming assets by 50% in the last year, will gradually complete consolidation this year and, he says, focus on hometown banks’ trump card. “We serve a whole set of customers that larger banks seem to have moved away from and do it with people who live and work in the communities they grew up in.”

The struggle goes on here, too. Granite Falls’ brightly colored shops, partly a result of $8,000 façade grants from the town, are mostly full. An Italian company, Lubrimetal Corp., recently announced it will spend $1.9 million to reopen a vacant plant, hire about 20 people and pay them an average of more than $40,000 a year to make specialized lubricating oil. “This is the first manufacturing plant to locate here in a long time,” Hayes says. A few miles up the road in Hudson, longstanding Kincaid Furniture Co. recently announced it would resume building wood pieces because inflation in China means it can again compete. A casegoods startup in Lincolnton says it hopes to hire 150 by year-end, under the same assumption. Stirrings, Hayes says, in a small town that deserves them.

A few Sundays ago, Mike Mackie drove down to Tater Hole at the lake on the outskirts of town where he swam as a boy. “I’ll bet there were 20 people down there fishing,” he says, laughing. “Should have been in church.” All it would take, they say here, is one good break, another John Forlines, and it could be like old times. “Granite Falls has been here through good and bad,” Mackie says, and like the rock in its name, it endures.